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Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of their firms' stock, and ownership levels have declined over the past 50 years. We hypothesize that public and private political forces impose constraints that reduce the payperformance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis. The conflict of interest between shareholders of a publicly owned corporation and the corporation's chief executive officer (CEO) is a We have benefited from the assistance of Stephanie Jensen, Natalie Jensen, Mary Rojek, and Mike Stevenson and from the comments of Sherwin Rosen (the editor),

Data extracted from Compustat's ExecuComp database, using grant-date option values based on ExecuComp's Black-Scholes' calculations. 2 Prevalence data are based on the American Compensation Association's 1997-1998 Salary Budget Survey, and include survey results from 735 publicly traded corporations.